Responsible Drilling Alliance

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22
Apr

To Lease… or Not to Lease

Disclaimer: This page is provided for information only and should not be construed as legal advice. Please consult a lawyer before signing any gas lease or other binding legal document.

To Lease … or Not to Lease How do you decide?

The Landman Cometh: Gas Leasing in the Marcellus Shale

A few things you need to know:

  • A lease is forever, like a diamond. A gas lease is a deed that is filed at the county courthouse; it is a restriction on your title to your land. Once you sign, control over your land will in many ways be out of your hands. That’s because a gas company may be able to extend its lease merely by “conducting operations” – which doesn’t necessarily mean drilling a well or producing gas on which you will receive royalties. Depending on the terms of the lease, you may not be able to terminate the lease if the gas company wants to hold it and wait.In lawyer-speak, a gas “lease” is not really a lease at all. Technically, it is a fee simple determinable transfer—a transfer of title with an automatic condition attached, since the lease typically continues indefinitely provided certain conditions are met.
  • Lease agreements come in many varieties. Landmen will hand you a contract written by a gas company. Its terms are in the gas company’s interest – but not necessarily in your interest.For example, you as the landowner seek to protect your property, to minimize surface disturbance, to avoid lasting damage, to prevent any diminishment of lifestyle, and to achieve a regular income from royalties. On the other hand, the gas company seeks to maximize profit while minimizing expenses, to control the rate of production according to corporate needs, and to have a free hand in shaping the land and erecting structures and feeder pipelines. A lawyer with knowledge of gas leases can help you negotiate more balanced terms. Never sign a gas lease without first consulting a knowledgeable attorney.

Here is a “rule of thumb” suggested by a lawyer who deals with gas issues: The first rule of dealing with landmen is: “Never take what the landman says at face value.” The second rule: “Refer to Rule One.” Remember: If it’s not in writing, it doesn’t count.

  • You can sign a gas lease that forbids any drilling on your land. A so-called non-surface-disturbance agreement allows a gas company to remove gas from beneath your land from off site, while providing for you to receive royalties just like any other landowner who leases. Using horizontal drilling, a Marcellus Shale gas well can reach under your property from a mile or more away. Check out this option if you are worried about intrusive development of your land.
  • Are you sure you own the gas rights to your land? Some people find that gas rights to their property were sold at some point in the distant past. Before finalizing a lease, gas companies will do a title search to be sure your title is clear. If it is not, a lawyer should be able to help you clear your title.
  • What if you have already signed a gas lease? Check to see when the primary term ends (after three years? after five years?). If operations do not start by the end of the primary term, the lease may expire – or the gas company may have the option of renewing the lease by paying you a renewal fee (“delay rental”).If a lease expires or if a gas company chooses to surrender its lease, you can start afresh. You can try to negotiate a new lease at better terms with any gas company that shows interest. Again, though, do not try this without a lawyer.

How can you find a suitable lawyer?

The Penn State Extension Service maintains a web site listing lawyers who have offered to handle gas leases. This is not an exhaustive list. Other attorneys may also claim to be knowledgeable about leasing issues.

Please note that law offices can structure their fees in many ways (by the hour, by the lease, by the acreage involved, as a percentage of the signing bonus), so you’ll want to check with more than one office before hiring a lawyer.

Ask about a lawyer’s level of experience and familiarity with gas and oil law, and be sure you are comfortable with the person you choose.

Some helpful Web sites:

Landman Report Card http://www.landmanreportcard.com/lrc/info/faq/ 

Oil and Gas Accountability Project http://www.ogap.org/ 

Natural Gas Forum for Landowners http://www.pagaslease.com/natural_gas_forum/index.php 

National Association of Royalty Owners http://www.naro-us.org/

The Law Works : Oil and Gas Leases (27-minute TV discussion from West Virginia Public Broadcasting) http://www.youtube.com/watch?v=Wt6iDBN7OBY

Penn State Cooperative Extension Sites

Leases http://extension.psu.edu/naturalgas/issues/leases/

Legal issues http://extension.psu.edu/naturalgas/issues/legal-issues/

Note: www.youtube.com has many other videos on all aspects of natural gas drilling, including some cautionary tales about pollution that has been linked to hydrofracking in Pennsylvania and other states.

This web document was prepared by the Fair Lease Committee of the RDA. Members of the committee include Robert Cross (rcross@equinoxltd.com), Gregory Pais (gpaisnd@gmail.com), and Sheila and Norman Lunger (nlunger@epix.net). You may e-mail us if you have questions.

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